Chris Lombardi puts defense and security under the spotlight, as he shares his takes on recent NATO and EU cooperation and provides insight into the company’s own long-term strategic partnerships in Europe.

Three trends are currently driving the global electricity sector: decarbonization, decentralization and differentiation. Utilities are making significant contributions to mitigate carbon emissions, while a technology revolution is …

After the fat years, seven lean years?

Joaquín Almunia, the European commissioner for economic and monetary affairs, let the cat out of the bag a couple of weeks ago. At a seminar organised by Bruegel, a Brussels think-tank, on 16 June, he said that it could be two to four years before the eurozone emerges from the current economic slump – the severe global downturn widely dubbed “the Great Recession”.

Since it is already two years since the US sub-prime banking disaster triggered the transatlantic financial crisis, today’s global economic catastrophe is assuming biblical proportions. The Bank of England said last week (25 June) that financial losses from the global credit crunch have now hit £15 trillion, which is equivalent to nearly half the world’s annual gross domestic product. Eurozone unemployment is already heading back up to 10% next year, almost double the 2007 rate, according to the Organisation for Economic Co-operation and Development (OECD), the rich countries’ Paris-based think-tank, which published its latest “Economic outlook” on the same day.

Stabilising

Its short-term projections show that after falling off a cliff in the fourth quarter of 2008 and early 2009, as companies slashed production to clear excess stocks, output is now stabilising.

Just as intriguing, however, is chapter four of the OECD report, which deals with longer-term prospects. “A major uncertainty,” it says, “is the magnitude of any adverse effects the crisis may have on the level or growth rate of supply-side potential.” In other words, is this recession so severe that it will affect the rate of growth of the advanced economies not only in the short term, but also in the medium or long term? When severe, the OECD says, crises can permanently lower potential output by up to 4%.

Uncertain outlook

Mervyn King, the governor of the Bank of England, hinted at similar concerns on 24 June. Far from seeing the fabled ‘green shoots’ of recovery, he said the economic outlook was “more uncertain now than ever”. This is a view shared by one of the eurozone’s most influential central bankers, who told a private meeting in London recently that he did not know whether we would soon see a resurgence of inflation or a collapse into deflation, falling prices and growth.

King was certain the recovery ahead will not be “normal”. This is because banks are still reluctant to lend and governments that are already burdened with debt are adding further trillions of dollars and euros as they support troubled banks and try to spend their way out of recession

Professor Nouriel Roubini of the Stern School of Business at New York University, who correctly saw the crisis coming, agrees. “The recovery is likely to be anaemic and sub-par as the burden of (past) debts…limits the ability of households, financial firms and corporations to lend, borrow, spend, consume and invest,” he fears. He does not rule out a ‘double dip’ recession, another stomach-churning lurch downwards.

Looking at the medium term, the OECD points out that investment by companies is likely to be subdued. It worries that workers pushed into unemployment will not find their way back into the labour force. It also fears that when recovery begins, governments will simultaneously start to rein in their anti-crisis spending, producing a dangerous, internationally ‘synchronised’ public sector consolidation.

Economic divergences

For the eurozone itself, the medium-term outlook is, to be kind, challenging. The slump is now increasing longstanding intra-eurozone economic divergences. In addition, eastern neighbours, including Russia, are financially and economically troubled. The well-advertised difficulties in restructuring to cope with the competitive threats from China, India and Brazil have mushroomed.

All of this sits rather oddly, but worryingly, with the evidence that reckless investment bankers and speculators are again destabilising commodity markets, helping to drive, for example, oil prices higher, so sapping consumers’ spending power and perhaps paving the way for a new financial collapse.

Long-term interest rates have also been on the rise, in part because of ballooning government borrowing. Jean-Claude Trichet, the president of the European Central Bank (ECB), said on 21 June that this concerns him.

No less disturbing is the lack of a transatlantic consensus about how to manage economic, especially monetary, policy. To their credit, the ECB and its US counterpart, the Federal Reserve, have proved in the past two years that they can work together at crisis management. But what about the future? Deciding when to start raising short term interest rates from today’s super-low levels will be difficult enough. Co-ordinating such policy changes across the Atlantic has rarely happened. The 1985 Plaza exchange rate accord led to a short-lived and not too reassuring example.

Washington has a different economic policy mindset from Frankfurt’s. And Ben Bernanke, the Fed’s charmain, has a record of being far too responsive to political pressure and too worried about recession and deflation.

So it would be interesting to know what he thought of comments last week (26 June) by his predecessor Alan Greenspan, who wrote that by 2012, a presidential election year, inflation will again rear its head.